Rising stock market buoys Baltimore firms

The stock market's banner year brought good news to Baltimore money management firms, with leaders pointing to a rising tide that buoyed their funds and their companies' prospects.

Market indices soared in 2013, with the S&P 500 up almost 30 percent, the Dow Jones industrial average up 27 percent and the Nasdaq up 38 percent. The stocks of smaller companies, in particular, climbed: the Russell 2000, one of the indices used to measure small-cap funds, rose about 39 percent.

It was the best annual performance since the 1990s for the S&P and the Dow, and the best since 2009 for Nasdaq. And that's translated into strong returns, new jobs and bonuses at many Baltimore investment firms, though they're tempering expectations for 2014.

"It's a terrific year. People are very happy," said Eddie Brown, chairman and CEO of Brown Capital Management, where assets under management grew to $7 billion from $4.5 billion, contributing to the company's best year since he founded it in 1983.

Brown Capital's Small Company Fund, which closed to new investors in October, was up more than 50 percent. Other funds managed by Baltimore-area firms also posted returns that matched or beat the market.

"We did very well, as I suspect most firms did. The market was very much an all-ships-rose-with-the-tide-type market," said David Stepherson, chief investment officer for Baltimore-based Hardesty Capital Management, which saw its equity returns rise 32 percent during 2013, while its total portfolio increased 20 percent.

Larry Puglia, portfolio manager for T. Rowe Price's Blue Chip Growth Fund, said growth in his fund was driven by strong performance in Internet businesses, including Amazon, Google and Priceline, as well as industries such as health care. Blue Chip, which posted 2013 returns of 42 percent, was T. Rowe's fifth-best-performing fund last year.

But many portfolio managers said the market's gains weren't isolated to specific sectors.

"There are some that have outperformed others, but I think you just point across the board, honestly," said David Churchill, partner for finance and operations at Brown Advisory, where new business and the market gains boosted assets under management by $14.5 billion to $46.5 billion.

The strong market translated into more jobs at both large firms and boutique investment houses. T. Rowe Price's employment rose by 4.9 percent to roughly 5,300 people by the end of September, with more than 4,000 in Maryland. Brown Capital added two people, rounding out a 35-person office. Hardesty filled a long-vacant position and added a new person to its now 13-member team.

The Lutherville-based Greenspring Fund also added someone to its 11-person staff as overall returns rose about 18 percent for the year. The company, which invests about evenly in stocks and bonds, performed well against the backdrop of a particularly difficult bond year, portfolio manager Chip Carlson said.

"We're very happy with an 18 percent which is achieved in a less volatile, pretty conservative manner," said Carlson, noting that the firm focuses on short-term, high-yield bonds.

Brown Advisory added 50 new people, swelling employment rosters 20 percent to roughly 340. The company plans to expand to a third floor at its Fells Point headquarters to accommodate the increase, Churchill said.

"That's very strong head count growth for us," he said. "The market increase has benefited both the city and the state to that extent."

The strong Wall Street returns also mean healthy bonuses, many firm leaders acknowledged, although they declined to go into detail. Many investment firms typically tie bonuses to the returns their funds give investors as well as asset growth.

"We're not going to be specific, but we will say that compensation was very generous," said Brown Capital's Brown.

"Are bonuses generally higher in good years? The answer to that is typically yes," said Stepherson, adding that at Hardesty, "things were good."

At Legg Mason, which has struggled in the past five years, 2013 marked a turnaround, a shift driven by confidence in new management and improvement in company operations, said Macrae Sykes, an analyst for Gabelli & Company. The company's fixed-income business, which represents more than half of its assets under management, performed well in a challenging year, and Legg Mason's own stock rose by about 70 percent, he said.

"When markets go higher, it's a rising tide that benefits our investors, which benefits our earnings and also lifts our stock price," said CEO Joseph Sullivan. "We've been up a bit more than others because the perception is we've done a pretty good job managing the company. We've gone through a challenging period and we're poised to get back on the growth track."

Legg Mason's global employment dipped by about 100 people, about half of the decline coming from Baltimore, a combination of attrition and the January merger of ClearBridge Investments and Legg Mason Capital Management.

Morningstar senior fund analyst Katie Reichart said investors may have been concerned that the conservatively managed company, where stocks represent about 76 percent of assets under management, wasn't taking as much advantage of the market boom as it could.

"Generally some of the funds are a little bit more cautious or conservative and those funds might not always be leaders in this type of market," Reichart said. "Those funds, relative to their peer groups, don't look outstanding, but they still all posted gains of practically 30 percent or more, so you can't really argue with that."

Portfolio managers said it will be difficult for 2014 to beat last year, and they are trying to lower expectations, although general signs of improvement in the economy still could bode well for stocks.

"What we're telling our clients is that … it's been a great 2013, but you need to bring your expectations down," said Hardesty's Stepherson. "We're expecting a below-average year for stocks. They'll probably be the best-performing asset class, but certainly nowhere near as exciting as they were in 2013."

Brown Advisory's Churchill also said the firm anticipates growth, albeit more modest, in the high single digits, while Brown Capital's Brown predicted growth of 10 percent to 12 percent.

"We don't feel it's a bubble," Churchill said. "We don't feel that the markets will be up as strong in 2014 as 2013, but we anticipate there will be steady growth."

While some have expressed concerns about the likelihood that the Federal Reserve will start to ease away from its stimulus program, Price's Puglia said he does not think that necessarily will hurt stock performance.

"Interest rates were going to have to rise at some point," he said. "If the rise in interest rates is moderate and comes as a result of improvement in the overall economy, that need not preclude stocks from performing well."